The Clues to Potentially More Strength For Natural Gas

This was the warmest winter on record according to many sources and apparently February and March were the warmest they have ever been as well. This is one reason investors have pointed to as to why Natural Gas prices have fallen – along with supply rising to historic levels as well. There’s been much discussion over the weather impact of La Nina, which is expected to shake things up this year with potential hurricanes and droughts across the globe. The National Oceanic and Atmospheric Administration predict a 40% chance of a related event by September. Luckily, as chart-focused traders we don’t have to be overly concerned with weather predictions. Let’s see what price is telling us about Natural Gas….

Spot nat gas prices have risen over 25% since their March low, sending the price action right back up to its 100-day Moving Average and creating a false breakdown below the prior December low. The 100-day MA was last tested back in early January as traders were unable to maintain their bullish bias and keep price from declining. As price ‘digests’ this previously important Moving Average, it appears momentum and trend strength are favoring higher prices.

Focusing on momentum, in the top panel of the chart below we have the Relative Strength Index (RSI). The March low created a bullish divergence that led to the 25+% rise and sent the indicator back to its prior most recent high. This is an area I’ll be watching going forward, waiting to see if momentum can breakout from this area of resistance.

In the bottom panel I’ve included the Average Directional Index indicator, which measures trend strength. As you can see, we also saw a lower high in this measurement as well – providing a clue that the down trend was losing some of its strength on that second leg lower.

nat gas chart

When reviewing commodities it can be a good idea to review seasonal charts as well, as many commodity trade in a seasonal pattern throughout the years. When looking for a market to break out or change trend, we’d prefer to not be fighting against an opposing seasonal direction. For Natural Gas, we can see in the chart below that the 5-, 10-, and 15-year seasonal studies show a low in March with price advancing until mid June. This lines up nicely with what we’ve seen play out so far this year.nat gas seasonalityAs I said before, going forward I’ll be watching the 100-day Moving Average and the resistance in the RSI momentum indicator for clues to nat gas’s ability to continue its current trend higher. We also know that we may get a weather tailwind this summer which could also add some juice to the price trend in the coming months.

 

Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see my Disclosure page for full disclaimer. Connect with Andrew on Google+, Twitter, and StockTwits.

Expecting A Bounce In Volatility

The S&P 500 has rallied over 10% since the February low, push the index up to its 50-week Moving Average. Meanwhile the Volatility Index ($VIX) has declined approx. 47%, sending the ‘fear index’ to its lowest level so far this year.

One way to use Moving Averages besides in terms of trend identification and areas of support and resistance is measuring how far a security or market is from its specified average price. Currently the $VIX is the furthest it’s been from its 50-day MA since the prior lower high in the S&P 500 back in October 2015. As the chart below shows, it’s now more than one standard deviation below the mean based on the distance Volatility historically travels away from its 50-day.

Previous instances of the VIX falling this quickly has led to tough market conditions in the short-term for equities. As I mentioned on Twitter yesterday, the $VIX is also near its 200-week Moving Average, which has been an important level in the past. Steve Deppe also shared on Twitter that when the VIX that since 1990 when the index’s 20-day return is less than -30%, the average forward return for the S&P 500 over the next 5, 10, 20, and 40 days has been negative.

It’s important to remember that there are two ways that Volatility can correct it’s current stretched condition – time and price. We could see VIX move sideways and remain near 15, allowing its 50-day MA to ‘catch up’ or we could see a bounce sending Volatility higher. We obviously can’t know which option will occur, but it does seem that some form of mean-reversion needs to occur – whether it be via time or a large price movement.

sp500-vs-vix-50d-rsma-params-5y-red-x-x

Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see my Disclosure page for full disclaimer. Connect with Andrew on Google+, Twitter, and StockTwits.

Is Gold Changing Trend or Seeing A Bear Market Bounce?

While the focus for 2016 has been squarely on equities, China, and oil, gold has been an interesting market to follow for the beginning of this new year. Below I’ll be reviewing three charts for gold ($GLD) and share my insights into what’s been taking place in the price action.

Monthly
First up is the monthly chart for gold ($GC_F) going back to 2005. I’ve included the 50-month Exponential Moving Average as well. While I typically use Simple MA’s more often, when looking at monthly charts with longer time frames being included in the average, an Exponential Moving Average can often provide a clearer picture, as it gives a stronger weight to the most current data.

As we can see in the chart below, the trend in price has been defined by the 50-month EMA, which has been a form of resistance since 2013 and is where gold prices are currently testing. I also would point out the level we’re at in the Relative Strength Index (RSI) – while this momentum indicator has been in a multi-year bearish range, it recently has broken out to a new 3 year high.

monthly gold

Weekly
Next we have the weekly chart. Here we can see the nice bullish divergences that have been taking place in momentum for both the RSI and MACD indicators. The RSI made its low back in 2013 and has been making higher lows ever since. While the MACD has been in a range since 2014. Price has been in a declining channel as shown by the blue trend lines on the chart below. Last week we finally saw price break out from this channel as the RSI moved close to 70.

gold weekly

Sentiment
Finally, we have sentiment. The graph below comes from SentimenTrader and shows sentiment for gold since January 2015. As you can see, while we had been at pessimistically low levels not that long ago, gold traders have now moved this sentiment gauge near an extreme optimistic level. Jason at SentimenTrader put things nicely in his take on gold, “If gold is undergoing a long-term (six-month+) trend change, then we likely won’t see too much of a correction from here. But for the moment, the bear market is intact, and extreme optimism during a bear market is usually greeted with heavy selling pressure over a multi-week time frame.”

gold sentiment

I agree with Jason in that we are at an important moment for gold in whether it’s long-term down trend is preparing to flip. Going forward I’ll be watching to see how gold prices react to levels I’ve mentioned above (the resistance on the monthly and channel levels on weekly). I want to see how gold reacts around the $1300 level on the upside and we do get a pull back, if it respects prior resistance from the channel on the weekly chart.

Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see my Disclosure page for full disclaimer. Connect with Andrew on Google+, Twitter, and StockTwits.